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There is a lot of uncertainty around Social Security and its future role in providing this benefit. However, for those retiring today it is important to understand how the system works and use it to your best advantage.

Here are five things you should know about Social Security:

1. The Social Security system hasn’t gone broke

Social Security is a government program facing prospects of reform and trouble with solvency. According to a recent Social Security Trustees report, the system is projected to pay full benefits until 2037. After that, the trust fund will be exhausted, the system will go back to pay-as-you go financing, and benefits may be reduced to 76 percent of current levels.

An enormous amount of media attention and messages from the financial services industry have contributed to broad consensus among baby boomers that Social Security won’t be there for them.

Many are so conditioned not to count on Social Security that they don’t even realize that the system hasn’t gone broke (yet) and it stands ready to be tapped by the next generation of retirees.

A prudent approach is to work with the rules as they exist today. When reform does come, it will be time to incorporate the relevant changes into one’s retirement plans.

2. The lifetime value of Social Security is far greater than most people realize

For example, a person who started receiving the maximum monthly benefit of $2,346 in 2008 would receive about $740,000 if he lives another 20 years, and over $1.3 million if he lives 30 years. (The estimates assume the benefits are increased by a 2.8 percent cost of living adjustments annually).

A big question to explore is when to elect benefits. The lifetime amount received can be greatly increased or decreased by decisions made early in the process, so it is important to make an informed decision.

Retirees who elect a reduced benefit at age 62 could end up leaving hundreds of thousands of dollars on the table if they live into their 90s. On the other hand, claiming early benefits can make sense if someone is coordinating spousal benefits, or has a low life expectancy.

3. Social Security personnel may not have all the answers you need

First, Social Security personnel are not financial planners. They do not understand the full scope of your financial circumstances and are not in the best position to address your complicated personal questions and guide your decisions. Social Security is complex, and finding the best solutions for you may require extensive knowledge of both the system and your personal circumstances.

The second reason is that the strain on Social Security personnel will increase as the baby boom generation lines up to begin receiving benefits. Personnel may have less and less time to provide the level of detailed support needed to guide individuals regarding important decisions.

4. Social Security helps address key retirement risks

Two of the major risks that retirees need to address are longevity and inflation. Social Security can help manage both. Longevity risk is living too long and running out of money. Because Social Security benefits pay for life, this portion of your income is not subject to this risk.

Inflation risk is the loss of purchasing power over time as income remains constant (like most pension income) and costs go up. Social Security benefits feature a cost of living adjustment that helps to mitigate the risk of inflation during retirement.

Social Security is very complex and there are few rules of thumb that apply to everyone. Each person’s situation should be analyzed individually and coordinated with the rest of your financial and life plan.

Understanding how Social Security fits into the overall retirement plan is essential. A diversified retirement income plan can generate income from a variety of sources to meet spending needs throughout retirement.

Social Security and pensions can provide fixed and reliable income for life. By contrast, personal assets provide flexibility to take more or less income as needed and to invest the assets for growth. Investing personal assets can help to address risks such as inflation and health care expenses.

Social Security planning can involve coordination of IRA required minimum distributions and the taxation of Social Security benefits, strategic use of spousal Social Security benefits, exploring how work may affect benefits, and boosting benefits by increasing earnings prior to retirement.

CONCLUSION

Most people do not give much thought to Social Security during their working years, and do not fully understand how the system works. But over a lifetime of working, most Americans accumulate retirement benefits that are far more valuable than they may realize.

Social Security plays a key role in helping to address some of the key risks that exist for retirees, such as loss of spouse, longevity and inflation.

Making well-informed decisions and taking a strategic approach in electing benefits can boost one’s financial security. Finding an adviser with expertise in this area can be highly beneficial, because they will have the ability to integrate Social Security with your overall plan for retirement.

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